A better spread of roads, electricity and cell phones is raising rural incomes like never before, says Neelkanth Mishra

Sometimes, putting one and one together does make 11, but many of us seem hardwired in our thoughts to assume rural income growth is a zero-sum game. For example, some people believe subsidies have driven the 15-20 per cent a-year growth in rural wages over the last five years. They come up with "explanations", including "people are selling land and consuming", "rising minimum support prices", and "NREGA is taking people away from the job market".

Personal experience also serves to cement such conclusions. Almost everyone, for example, knows someone in their extended family who sold land and drank away the money. However, each of these is unconvincing when challenged by facts.

Let's start with land. More than 80 per cent of Indian households hold less than two acres. While rising land prices may help sentiment, the cash for consumption cannot come from land sale as there isn't much to sell.

Then, take NREGA: the 2.3 billion person-days of work it creates annually is less than 4 per cent of the available rural person-days. The annual spend per eligible person is less than Rs 1,000. That cannot explain 20 per cent wage growth for five years, especially when NREGA wages rose only at a 10 per cent clip. If the availability of the NREGA alternative was the reason workers demanded more for regular work, the gap between regular wages and NREGA wages would not have expanded every year.

Lastly, minimum support prices (MSPs) affect less than 40 per cent of India's farm output, and are more the effect than the cause: a sign of rising costs. Even the argument that high MSPs for cereals prevent the shift to crops with deficient supply is untenable as fruit and vegetables yield 5.5-6.0 times the realisation of cereals per hectare. The only constraint on the shift of acreage to fruit and vegetables seems to be the inability of farmers to reach viable end-markets.

End of Dark Age

What is really driving this unprecedented income growth at the bottom of the income pyramid? Simply put, it is improvement in ground-level infrastructure that helps achieve two targets. Firstly, the spread of wireless telephony and rural roads have helped create larger economic clusters, allowing the creation of new types of jobs. Secondly, better rural infrastructure has added several productive hours in a day that can be put to productive use.

Why didn't this happen earlier? State governments weren't responsive, but now they are. Despite much cynicism about most of these schemes being leaky and ineffective, 4,00,000 km of good quality all-weather rural roads have been built in the last 12 years, connecting 88,000 new habitations. Then, 12 per cent of Indian households got electrified in the last decade: the percentage of households without electricity dropped from 45 per cent to 33 per cent. The cost of light from a light bulb is a fraction of the cost of light from a candle or kerosene lamp.

Edison is supposed to have said, "We will make electricity so cheap that only the rich will light candles." So, working hours are no longer defined by daylight. Cell phone batteries get recharged any time, buffaloes can be milked at night or a housewife can roll samosas for a nearby dhaba after her kids go to bed.

Mobile phones have been the most potent catalyst: since a high 30 per cent of India's workforce is casual, suddenly the time taken to find the next job has fallen dramatically with the advent of the mobile phone. Mobile phones and roads help create larger economic clusters, which allow people to specialise, improving productivity.

The Good Roads movement began in the United States in the 1800s with a demand from bicyclists. The movement acquired greater importance as automobiles came on the scene.

For example, a farmer living in a village with 2,500 people but without roads and phones can't specialise in poultry farming, as there is insufficient demand. But when 50-100 villages are connected by roads and phones, a large number of people can get easy access to chicken from several new poultry farmers. The same arguments work with vegetable production; hence 1 + 1 = 11.

Harvesting Uniform Income

Poultry farming and agriculture can create millions of better-paying opportunities for the rural population, given the right infrastructure. Furthermore, as incomes become more uniform throughout the year, as opposed to large cash inflows during one or two harvests when the economy was largely agrarian, large villages have started to see four or five stores opening. These could have created several million jobs in the last five years. As the number of houses with cemented walls in rural India grew at an 8 per cent compounded rate last decade, it has created millions of jobs in brick kilns and construction.

Wages of High Income

This spurt in specialisation and productivity is changing the terms of trade between unskilled labour and the rest of the economy. Underlying much of inflation is food inflation, which, in turn, is driven by the cost push of wages, particularly for fruit and vegetables and animal products, the farming of which remains labour-intensive. How long can these terms of trade continue to change? Perhaps until an average middle class family cannot afford an army of helpers.

(The writer is Credit Suisse's India equity strategist. This article first appeared in The Economic Times)